ITAD BIR Ruling No. 235-13

August 15, 2013 ITAD BIR RULING NO. 235-13 Articles 5 and 7, Philippines-Japan Tax Treaty; Sections 28 (B) (1), 32 (B) (5), and 108 of the Tax Code, as amended CBK Power Company Limited 25th Floor, Philamlife Tower 8767 Paseo de Roxas, Makati City Attention: Atty. Cheryl Edeline C. Ong Gentlemen : This refers to your application for tax treaty relief filed on December 27, 2012 requesting confirmation that payments made by CBK Power Company Limited ("CBK") to Electric Power Development Company Ltd. ("EPDC") are not subject to income tax pursuant to the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Japan tax treaty") , as amended by a Protocol. 1 cIETHa It is represented that EPDC is a foreign corporation organized and existing under the laws of Japan and a resident thereof based on the Residence Certificate issued by the District Director of Kyobashi Tax Office on November 22, 2012 with office address at 15-1, Ginza 6-Chome, Chuo-ku, Tokyo, Japan; that EPDC is not registered as a corporation or partnership in the Philippines based on the Certification issued by the Securities and Exchange Commission dated December 26, 2012; and that on the other hand, CBK is a domestic corporation with principal office address at the 25th Floor, Philamlife Tower 8767 Paseo de Roxas, Makati City. It is further represented that on June 29, 2012, CBK and EPDC entered into an Annual Service Agreement ("Agreement") whereby EPDC shall provide CBK the following services: (1) Electrical and Mechanical Work and (2) Civil Work; that for and in consideration of the said services, CBK shall pay EPDC JPY55,210,000.00 which consists of (a) JPY30,750,000.00 and (b) JPY24,460,000.00; that all fees for said services shall be paid on or before the 5th day following the date of filing of the TTRA by wire transfer to such account designed by EPDC and all fees for additional services shall be paid no later than 30 days from the date of an invoice from EPDC requesting payment for such additional services; that first payment under the Agreement was made on January 11, 2013 based on the Certification issued by the Hongkong and Shanghai Banking Corporation Limited on February 4, 2013. It is further represented that the following personnel of EPDC were sent to the Philippines to render services pursuant to the Agreement: Name Date of Arrival Date of Departure Number of Days in the Philippines Akihiko Matsui February 13, 2012 February 18, 2012 6 Yutaka Ogawa Hitoshi Sakurai March 11, 2012 March 15, 2012 5 April 23, 2012 April 26, 2012 4 November 12, 2012 November 17, 2012 6 Fumihiko Saito May 16, 2012 May 20, 2012 5 Masayoshi Naruoka Kuninori Tanaka July 26, 2012 August 5, 2012 11 Katsuya Kimura Manabu Murakami July 17, 2012 July 21, 2012 5 Total number of days in the Philippines 42 days ======= In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies in general to income received by a nonresident foreign corporation which provides: DHETIS "Section 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation . (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interest, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs 5(c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: "Section 32. Gross Income . xxx xxx xxx (B) Exclusions from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. xxx xxx xxx" Thus, you invoked Article 7 of the Philippines-Japan tax treaty which provides: cEaDTA "Article 7 1. The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is attributable to that permanent establishment." Based on the above, the profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them that is attributable to that permanent establishment. Applying this to the instant case, the payments received by EPDC from CBK for services rendered in the Philippines shall be taxable in the Philippines only if it has a permanent establishment in the Philippines in connection with the activities giving rise to such income. In relation thereto, Article 5 of the same tax treaty defines a permanent establishment, as follows: "Article 5 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. SCaITA xxx xxx xxx 6. An enterprise of a Contracting State shall be deemed to have a permanent establishment in the other Contracting State if it furnishes in that other Contracting State consultancy services, or supervisory services in connection with a contract for a building, construction or installation project through employees or other personnel other than an agent of an independent status to whom paragraph 7 applies provided that such activities continue (for the same project or two or more connected projects) for a period or periods aggregating more than six months within any taxable year . However, if the furnishing of such services is effected under an agreement between the Governments of the two Contracting States regarding economic or technical cooperation, that enterprise shall, notwithstanding any provisions of this Article, not be deemed to have a permanent establishment in that other Contracting State. . . . " (underscoring supplied) Considering that EPDC has performed services in the Philippines based on the Agreement for a period of 42 days based on the relevant Certification, and for as long as such duration of services will not aggregate more than six months in relation to the same project, then EPDC is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed to. Such being the case, the payments made by CBK to EPDC are not subject to Philippine income tax pursuant to Article 7 in relation to Article 5 of the Philippines-Japan tax treaty. However, payments for services of EPDC through its personnel, however, are subject to VAT pursuant to Section 108 of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended which provides: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties . (A) Rate and Base of Tax . There shall be levied, assessed and collected, a value-added tax equivalent to twelve percent (12%) 2 xxx xxx xxx . . . The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, . . ." Accordingly, services performed or to be performed by EPDC to CBK under the Agreement are subject to 12 percent VAT. ATHCac Accordingly, CBK, being the resident withholding agent and payor in control of payment, shall be responsible for the withholding of the 12 percent final VAT on such fees, pursuant to Section 108 of the Tax Code of 1997, as amended by Republic Act No. 9337, before making any payment to EPDC. In remitting the VAT withheld, CBK shall use the BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from CBK if it is a VAT-registered taxpayer. In addition, CBK is required to issue in quadruplicate the relevant Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307), the first three copies to be given to EPDC and the fourth copy to be given to CBK as its file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002). This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Protocol Amending the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income effective January 1, 2009. 2. The VAT rate was increased to 12% on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.